During my conversation with Benedict Evans as we recorded the 4th episode of our podcast, we got to discussing some competitive players in the mobile market. During this conversation Benedict brought up how aggressive Samsung is with a portion of their marketing budget which goes to commissions to sales reps who sell their devices. Now while Samsung does make a good sum of money and has had record quarters over the past few years, their marketing budget is astronomically high. The reason for this, as I point out in the podcast, is that Samsung has a nearly limitless bank account. Samsung, like LG, is backed by their nation state of South Korea. After I made this point, Benedict added that so is Huawei, and of course several other Chinese ODMs, who are also backed by their nation state. When there is a guarantee of a cash trove behind you, it is possible to make business decisions that perhaps other companies without such a wealthy backer would make. In essence the rules for spending may simply be different for a company like Samsung and other Asian OEMs / ODMs who have nation state backing. ((The backing of nation states to certain companies is worth a much deeper analysis as it relates to the competitive landscape.))
With this backdrop in mind I propose a theory. ((Feel free to offer alternate theories as well, I’m just lobbing this one out there)) Perhaps Apple is building its bank account, which is now estimated at about $150 billion with this competitive point in mind. Apple has no guarantee from their nation state who will keep them in business if all goes down the tubes where a number of their competitors do have this guarantee. ((Chart of Apple’s projected cash reserves. Although $200 billion is unlikely for this year, it seams reasonable for 2014))
So perhaps, Apple growing its bank account is less about what companies they can buy but more about the nature of their competitors who have what is in essence very large bank accounts as well. If we understand the competitive nature of this point, then it makes it easier to grasp and support the idea that Apple should not only hold onto its cash but should also keep building it. Perhaps Apple is building for itself the same sort of financial backing that is guarantee to a number of its prime competitors by their nation states.
Now, while I don’t offer this up as a point that they should just sit on all this cash for this reason. Of course, using it for dividends, or investments in long term strategic RND and CapEx, etc, are all important. But I do think we should think about this competitive point as to why the cash matters and should not dramatically be made smaller.
Perhaps by building this bank account it allows Apple to play along the same rules as their competitors who have nation state financial backing. One other very important point that can not be missed is that this bank account they are building allows them to be patient and more deliberate with their market moves. Which, in my opinion, can not be underestimated.